Revenue-48 Cr.

Profits-1.8 Cr.

Shree Oswal’s story can be best told through excerpts from our Conversation with the promoter

“ We have huge plans to grow and expand”

The company’s revenues in the past 4 years have largely remained stagnant. During a good monsoon season in 2014-15, the company made close to ~ 60 Cr in Revenues. The following year, when monsoons were bad, their revenues dropped to ~40 Cr. This financial year they made ~48 Cr. So it’s not on a growth path per se.

But there is renewed hope that they might scale operations soon, for 2 reasons

The company has a subsidiary that manufactures Psyllium (fibrous plant) seeds, and at the consolidated level, the parent company and the subsidiary, made ~ 78 Cr in FY 18.

The company has contracts with 752 farmers giving them access to around 3800 hectares of land. That is an improvement from 2600 hectares, last year. This allows the company to grow more seeds

Consolidated : The parent company+ Subsidiary that manufactures Psyllium, a fibrous seed used as a dietary supplement and cattle feed

Revenue- 77 Cr

Profits - 2.2 Cr

“Our production capacity will increase from 14000 ton to 24000 ton”

True. The company has elaborated in great detail how they plan to spend the proceeds of the IPO in purchasing machinery to improve capacity. They have also provided quotes for prices of equipment they plan to bring in.

Of the 7.8 Cr they hope to raise from the IPO, the company has earmarked 1.63 Cr for increasing capacity.

But they have made another bold claim. Apparently, the management expects to increase production, from 13000 metric tons to ~22,000 metric tons in the next fiscal year. Apart from this increase in production, the promoter also told us that the psyllium plant within the subsidiary entity is operating at 50% capacity and that they plan to increase it to about 80%.

While there is no harm in Producing and processing seeds, it is important to see if the company has the manpower and the resources to sell their produce.

“We are expanding in States like Maharashtra and planning to enter states like Andhra Pradesh”

Currently they have a robust dealer network in Maharashtra, Madhya Pradesh and Rajasthan where they sell most of their produce.

However their Marketing team has about 5 people in total. When pressed on how he plans to improve sales with such a small team. Sanjay told us there will be some hiring in this department soon, Plus, you can only sell seeds, if there is demand. Often times the most important aspect of a seed manufacturing business is demand estimation and forecasting. If they forecast accurately, the company can improve both its top line and bottom line. If they don’t, they will have large piles of inventory that will negatively impact the top and the bottom line.

“Don't worry. The margins are going to improve”

On a standalone basis, the company’s Profits after tax stood at 1.7 Cr. PAT margins in the past have also largely remained at 2-3 %. This can be a problem going ahead for the following reasons

The company’s interest expense has been increasing and there is fear on whether the company will be able to cover their interest at current profit margins. If their profit margins don’t improve, banks will be reluctant to extend loans and that is a problem

Their Cost of Material Consumed is about 80-90% of the Total Revenue. Unless they find a way to reduce this expense, their margins won’t improve

“We will start leasing land from farmers and we can get the seeds at a better price”

There is some truth in this. Buying land reduces material expense and improves profit margins. We know this because 10 years earlier, Kaveri Seeds did something similar. The year they filed their IPO, Kaveri Seeds improved their margins considerably, simply by purchasing the land where they grew seeds.

However Kaveri Seeds, also invested significantly in Research and Development expense, sold high yielding seeds, and built a brand that allowed them to command better prices and improve their margins. So this is only partly true

“We are also doing a lot of R&D on the 10 acre land we own”

The company’s research expense is negligible and we couldn’t find this land on the company’s balance sheet.

The company is listed at a price of Rs. 25-26. At the upper band the company’s PE stands at about 13 based on the weighted average EPS. The industry PE stands at about 30. So it's not really overpriced. Also, we couldn't find any obvious red flags with the company.

But the company operates in a space where the more established players have significant market share and brand value. ShreeOswal's challenge will mostly lie in reducing cost and investing in R&D. The moment they show promise on this front, the company's stock will appreciate in value.